Yen against currencies of its major trading partners in 1999 (Landers 1999)
| Вид материала | Документы |
- Республики Башкортостан «Как платить за коммунальные услуги. Льготы. Тарифы. Субсидии», 2793.49kb.
- Седьмой Генеральной Ассамблее в Баку в июне 1996 г., доклад, 248.66kb.
- Москва 1999 moscow public science foundation е. Y. Basin art & communication: Essays, 1994.22kb.
- Программа вступительных экзаменов в аспирантуру по " Патологической физиологии " специальность, 323.88kb.
- Закон nr. 199, 1310.54kb.
- Ведомости Парламента Республики Казахстан, 1999 г., N 18, ст. 644; "Казахстанская правда", 5648.7kb.
- Федеральный закон «О банках и банковской деятельности», 561.3kb.
- Российская федерация федеральная служба по интеллектуальной собственности, патентам, 362.4kb.
- Евгений Колесов Тайная книга для женщин: как управлять мужчиной, 1507.29kb.
- Принят Государственной Думой 2 апреля 1999 года Одобрен Советом Федерации 22 апреля, 1244.88kb.
Economic exposure management depends on the assumption that disequilibrium conditions
exist in national markets for factors of production, products, and financial assets. For example,
consider the cases in which there are temporary deviations from purchasing power parity and the
international Fisher effect. Companies could observe changes in comparative costs, profit
margins, and sales volume in one country compared to another.
9.3.1 Diversified production
Several production strategies can deal with economic exposure when disequilibrium conditions
exist: (1) plant location, (2) input mix, (3) product sourcing, and (4) productivity increase.
First, companies with manufacturing facilities in many countries can quickly lengthen their
production runs in one country and shorten them in another in line with the changing currency
costs of production. Second, well-managed companies can substitute their input mix between
domestic and imported inputs, depending on the relative prices of inputs and the degree of possible
substitution. Third, well-diversified companies can make shifts in sourcing raw materials,
components, and products in accordance with currency value fluctuations. Fourth, companies
assaulted by wide swings in currency values can improve productivity by closing inefficient plants,
automating production processes, and negotiating concessions from unions.
9.3.2 Diversified marketing
Marketing programs are normally adjusted only after changes in exchange rates. Yet marketing
initiatives under conditions of exchange rate changes can obtain competitive leverage by means
of: (1) product strategy, (2) pricing strategy, (3) promotional options, and (4) market selection.
First, product differentiation, diversification, and deletions reduce the impact of exchange rate
fluctuations on worldwide corporate earnings. Second, prices may be adjusted to cope with the
consequences of currency-value changes. A pricing strategy is affected by a variety of factors such
234 MANAGING TRANSACTION EXPOSURE AND ECONOMIC EXPOSURE
as market share, profit margin, competition, and price elasticity. Third, the size of promotional
budgets for advertising, personal selling, and merchandising could be adjusted to reflect changes
in currency values. For example, a devaluation of the Japanese yen may well be the time to increase
a US company’s advertising budget in Japan. Fourth, a worldwide distribution system enables
companies to neutralize the impact of unexpected exchange rate changes on overall company
revenues.
9.3.3 Diversified financing
On the financial side, additional tools to protect against economic risk are the currency denomination
of long-term debt, the place of issue, the maturity structure, the capital structure, and
leasing versus buying. For example, LSI Logic, a manufacturer of custom-made microchips based
in California, uses four financial instruments: (1) equity markets in London and other European
markets; (2) Japanese equity through institutional investors such as Nomura Securities; (3) local
Japanese credit markets through its joint venture partners; and (4) Eurobond issues through Swiss
and US securities firms.
Diversified financing sources allow a company to improve its overall financial performance
because interest rate differentials do not always equal expected changes in exchange rates. In addition
to taking advantage of unexpected differentials in diversified markets, companies reduce economic
risk by matching the mix of currencies in loan portfolios or operating expenses to the mix
of currencies in expected revenues.
9.3.4 A summary of economic exposure management
Purely domestic companies do not have as many options for reacting to international disequilibrium
conditions as MNCs. International diversification neutralizes the impact of unexpected
exchange rate changes on corporate cash flows. Exchange rate changes under conditions of disequilibrium
are likely to increase competitiveness in some markets and to reduce it in others.
However, at least one serious constraint may limit the feasibility of a diversification strategy: companies
with worldwide production systems may have to relinquish large economies of scale.
However, these companies could still diversify sales functions and financing sources.
9.4 Currency Exposure Management Practices
9.4.1 The relative importance of different exchange exposures
Table 9.2 shows the relative importance of different exchange exposures from two perspectives:
the amount of attention given to each exposure and hedging preference for each exposure. A
survey of 125 US MNCs by Malindretos and Tsanacas (1995) revealed that transaction exposure
was the overwhelming choice of chief financial officers (CFOs) in terms of the attention
that it must receive, with 64 percent ranking it as the most important one. Twenty-six percent
of these CFOs picked economic exposure as their number one choice, while only 13 percent
considered translation exposure as their most important exposure. A survey of large US MNCs
CURRENCY EXPOSURE MANAGEMENT PRACTICES 235
by Business International and Arthur Andersen & Co. found that 65 percent of the sample companies
hedged their transaction exposure, while only 26 percent hedged their translation exposure.
Apparently, not many executives of MNCs think that they should hedge paper gains and
losses for translation exposure and potential exchange gains and losses from future operations
(economic exposure). In addition, these executives do not pay too much attention to these two
types of exposure, because they believe that these exposures are not as important as transaction
exposure.
9.4.2 The use of hedging techniques by MNCs
Burston-Marsteller, a consulting firm in currency risk management, conducted a survey of 110
chief financial officers at a November 1997 CFO forum in Manila, Philippines. Figure 9.1 shows
that these CFOs consider foreign-exchange risk (38 percent) as the most important one among
the many risks that they face. The next most frequently cited risks are interest rate risk (32
percent) and political risk (10 percent). Other risks (20 percent) consist of credit risk at 9 percent,
liquidity risk at 7 percent, and inflation risk at 4 percent.
Figure 9.1 also shows that the traditional forward contract was the most commonly used
instrument to manage foreign-exchange risks. Of all respondents, 42 percent used the forward
contract as the primary hedging instrument. Four other hedging techniques discussed in part II
of this book – currency swaps, interest rate swaps, currency options, and futures – were almost
equally used by these respondents. Another recent survey by Jesswein et al. (1995) also found
that the forward contract is the most popular hedging instrument. In addition, their other findings
confirm most of the Burston-Marsteller survey results.
9.4.3 A maturity mismatch in MGRM’s oil futures hedge
Metallgesellschaft (MG) is Germany’s 14th largest industrial company, with interests in engineering,
metals, and mining. In early 1994, the US subsidiary of the company, MGRM, reported
the world’s largest derivative-related losses — $1.3 billion from its positions in energy futures
and swaps. This incident brought MG to the brink of bankruptcy. After dismissing the company’s
chief executive officer and several other senior managers, MG’s board of supervisors was forced
to negotiate a $1.9 billion rescue package with the company’s 120 creditor banks. Many analysts
236 MANAGING TRANSACTION EXPOSURE AND ECONOMIC EXPOSURE
Table 9.2 The relative importance of different exchange exposures
Type of exposure Most important exposure Hedging preference
Translation exposure 13% 26%
Transaction exposure 64% 65%
Economic exposure 26% 39%
Sources: J. Malindretos and D. Tsanacas, “Hedging Preferences and Foreign Exchange Exposure Management,”
Multinational Business Review, Fall 1995, pp. 56–66; and D. M. Perkins, “Treasury. Accounting Must
Work Together to Fashion Foreign Exchange Hedging Strategy,” Corporate Cashflow, Jan. 1993, pp. 34–6.
remain puzzled over how a company could lose over $1 billion by hedging. This debacle has
sparked a lively debate on the drawbacks of the company’s hedging strategy and on the lessons
to be learned from the incident.
In 1992, MGRM began to implement an aggressive marketing program in which it offered
long-term customers firm price guarantees for up to 10 years on gasoline, heating oil, and diesel
fuel. These long-term price guarantees included: (1) firm-fixed contracts that guaranteed a set
price over the life of the contract; (2) firm-flexible contracts with prices that fluctuated with spot
oil prices; and (3) guaranteed margin contracts that pegged the price of refined oil products to
prices paid by local competitors. Through these contracts, MGRM had assumed most of the oil
price risk of its customers.
To hedge the risk of these delivery obligations, MGRM bought a combination of short-dated
oil swaps and futures contracts as part of a strategy known as a “stack-and-roll” hedge. In its simplest
form, a stack-and-roll hedge involves repeated purchases of a stack of near-term futures contracts
to hedge a long-term exposure. In other words, the long (buy) position was rolled over
each month into the next month’s contract. MGRM used a one-to-one hedging strategy in which
long-term obligations were hedged dollar-for-dollar with positions in near-term oil futures contracts.
As discussed in chapter 6, market gains or losses from fluctuations in the price of futures contracts
are debited or credited on a daily basis to protect market participants against the possibility
of contract default. Had oil prices risen, the accompanying gain in the value of MGRM’s
futures contracts would have produced positive cash flows; this gain in turn would have offset
losses arising from its commitments to deliver oil at below-market prices. However, short-term
cash drains must be incurred to meet margin calls when futures prices fall. Margin calls are a
broker’s request for additional money to restore the margin account to a certain minimum level.
As it happened, oil prices fell sharply in 1993.
Significantly lower oil prices in 1993 caused MGRM to incur huge unrealized losses and subsequent
margin calls on its derivative positions. After several consecutive months of falling oil
prices during the latter part of 1993, MGRM’s German parent liquidated its hedge and realized
losses in excess of $1 billion. The mismatch between the long-term delivery obligations of oil
CURRENCY EXPOSURE MANAGEMENT PRACTICES 237
Foreign exchange
38%
Interest rate
32%
Other
20%
(a) Current business risks (b) Hedging instruments used
Forward
contracts
Crosscurrency
swaps
Interest
rate swaps
Currency
options
Futures 11%
11%
18%
18%
42%
Political
10%
Figure 9.1 Survey results of 110 chief financial officers
Source: The Wall Street Journal, Nov. 19, 1997, p. A18; reprinted by kind permission.
and the short-term long position in oil futures created chaos for MGRM. In other words, fluctuations
in the price of short-dated futures contracts resulted in widely fluctuating short-term
cash flow needs that did not match the maturity of MGRM’s long-term contracts.
238 MANAGING TRANSACTION EXPOSURE AND ECONOMIC EXPOSURE
SUMMARY
This chapter has discussed two foreign-exchange exposures and their management. Every single
company faces an exposure to gain or loss from changes in exchange rates, because globalization is
totally reshaping the way we live and do business. Transaction exposure refers to possible gains or
losses that may result from the settlement of transactions whose payment terms are stated in a
foreign currency. Economic exposure measures the total impact of exchange rate changes on a firm’s
profitability.
In essence, a hedge or a cover is a type of insurance that provides security against the risk of loss
from a change in exchange rates. When devaluation seems likely, the MNC must determine whether
it has any unwanted net exposure to foreign-exchange risk. When the company finds that it has an
unwanted net exposure to exchange risk, it can use a variety of operational techniques and financial
instruments to reduce this net exposure. These include the forward market hedge, the money
market hedge, the options market hedge, swaps, and others. These financial instruments are primarily
used to minimize transaction exposures. Economic exposure can be managed by balancing
the sensitivity of revenues and expenses of changes to exchange rates through diversification and
strategic planning.
Questions
1 Explain the conditions under which items and/or transactions are exposed to foreignexchange
risks.
2 This chapter has discussed transaction exposure and economic exposure. Briefly explain
each of these two types of exposure.
3 How should appreciation of a company’s home currency affect its cash inflows? How
should depreciation of a company’s home currency affect its cash inflows?
4 What should management do to protect assets adequately against risks from exchange
rate fluctuations?
5 What are the two major types of hedging tools?
6 Which exposure is more difficult to manage: transaction exposure or economic exposure?
7 How could a US company hedge net payables in Japanese yen in terms of forward and
options contracts?
8 How could a US company hedge net receivables in Japanese yen in terms of forward and
options contracts?
PROBLEMS 239
9 Are there any special situations in which options contracts are better than forward contracts
or vice versa?
10 What are the major problems of economic exposure management?
11 What is the basic purpose of economic exposure management?
12 How do most companies deal with their economic exposure?
Problems
1 A US company negotiated a forward contract to buy 100,000 British pounds in 90 days.
The company was supposed to use the .100,000 to buy British supplies. The 90-day
forward rate was $1.40 per pound. On the day the pounds were delivered in accordance
with the forward contract, the spot rate of the pound was $1.44. What was the real cost
of hedging the pound payables in this example?
2 Boeing sells an airplane to Korean Airlines for 840 million won with terms of 1 year. Boeing
will receive its payment in Korean won. The spot rate for the Korean currency is 700 won
per dollar and Boeing expects to exchange 840 million won for $1.2 million (840 million
. 700) when payment is received.
(a) If the spot rate for won rises to 600 won per dollar 1 year from today, what is the
potential transaction gain or loss?
(b) If the spot rate for won declines to 1,000 won per dollar at maturity, what is the
potential transaction gain or loss?
3 For the coming year, a Singapore subsidiary of an American company is expected to earn
an after-tax profit of S$25 million and its depreciation charge is estimated at S$5 million.
The exchange rate is expected to rise from S$2.00 per dollar to S$1.5 per dollar for the
next year.
(a) What is the potential economic gain or loss?
(b) If the anticipated business activity were to stay the same for the next 3 years, what
would be the total economic gain or loss for 3 years?
4 A US company purchased several boxes of watches from a Swiss company for SFr300,000.
This payment must be made in Swiss francs 90 days from today. The following quotations
and expectations exist:
90-day US interest rate 4.00%
90-day Swiss interest rare 3.00%
90-day forward rate for francs $0.400
Spot rate for francs $0.404
Would the company be better off using the forward market hedge or the money market
hedge?
240 MANAGING TRANSACTION EXPOSURE AND ECONOMIC EXPOSURE
5 For the coming year, a British subsidiary of an American company is expected to incur an
after-tax loss of .50 million and its depreciation charge is estimated at .10 million. The
exchange rate is expected to rise from $1.5 per pound to $1.7 per pound for the next
year. What is the potential economic gain or loss?
6 A US company has bought a number of TV sets from a Japanese company for .100,000.
This payment must be made in Japanese yen 180 days from today. The following quotations
and expectations exist:
Present spot rate $0.0050
180-day forward rate $0.0051
Japanese interest rate 7.00%
US interest rate 11.00%
Highest expected spot rate 180 days hence $0.0052
Lowest expected spot rate 180 days hence $0.0046
The US company does not have any idle dollar balances at present, but it expects to have
adequate cash in 180 days. Identify the alternatives available for making payment.
7 An American firm has just sold merchandise to a British customer for .100,000, with
payment in British pounds 3 months from now. The US company has purchased from its
bank a 3-month put option on .100,000 at a strike price of $1.6660 per pound and a
premium cost of $0.01 per pound. On the day the option matures, the spot exchange rate
is $1.7100 per pound. Should the US company exercise the option at that time or sell
British pounds in the spot market?
8 Assume that a subsidiary in New Zealand needs NZ$500,000 and that a credit swap has
been proven the least costly hedged alternative. Further assume that the best unhedged
alternative is the direct loan from the parent and that the cost of the direct loan is 20
percent. The current exchange rate is $0.5000 per New Zealand dollar. To obtain
NZ$500,000 for the subsidiary in New Zealand, the parent must open a $250,000 credit
($0.5000 . NZ$500,000) in favor of a New Zealand bank. The New Zealand bank charges
10 percent per year on the NZ$500,000 made available to the subsidiary and pays no
interest on the $250,000 deposit that the parent has deposited in the bank.
(a) What is the exchange rate that would make the direct loan and the credit swap
equally attractive?
(b) If most market analysts predict that the exchange rate will be NZ$2 per dollar in 180
days, which alternative would you recommend?
(c) If most market analysts predict that the exchange rate will be NZ$3 per dollar in 180
days, which alternative would you recommend?
(d) If the New Zealand bank should pay 5 percent interest on the $250,000 credit, what
is the exchange rate that would make the direct loan and the credit swap equally
attractive?
CASE PROBLEM 9 241
REFERENCES
Belk, P. A., “The Organization of Foreign Exchange
Risk Management: A Three-Country Study,”
Managerial Finance, Vol. 28, No. 11, 2002, pp.
43–52.
Brown, G., “Managing Foreign Exchange Risk with
Derivatives,” Journal of Financial Economics,
May/June 2001, pp. 406–48.
Choi, J. J., “Diversification, Exchange Risk, and
Corporate International Investment,” Journal of
International Business Studies, Spring 1989, pp.
145–55.
DeVries, M. G., “The Magnitude of Exchange
Devaluation,” Finance and Development, No. 2,
1968, pp. 8–16.
Giddy, I. H., “The Foreign Exchange Option as a
Hedging Tool,” Midland Corporate Finance, Fall
1983, pp. 32–43.
Giddy, I. H. and G. Dufey, “The Random Behavior
of Flexible Exchange Rates,” Journal of International
Business Studies, Spring 1975, pp. 1–32.
Jesswein, K., C. Y. Kwock, and W. Folks, “Corporate
Use of Foreign Exchange Risk Management
Products,” Columbia Journal of World Business,
Fall 1995, pp. 70–82.
Kuprianov, A., “Derivatives Debacles: Case Studies
of Large Losses in Derivatives Markets,” Economic
Review, Federal Reserve Bank of Richmond, Fall
1995, pp. 1–39.
Landers, P., “Sony’s Net Falls 25%, Underlining
Strong Yen’s Impact on Exports,” The Wall Street
Journal, Oct. 28, 1999, p. A21.
Malindretos, J. and D. Tsanacas, “Hedging Preferences
and Foreign Exchange Exposure Management,”
Multinational Business Review, Fall 1995,
pp. 56–66.
Perkins, D. M., “Treasury. Accounting Must Work
Together to Fashion Foreign Exchange Hedging
Strategy,” Corporate Cashflow, Jan. 1993, pp.
34–6.
Case Problem 9: Western Mining’s Economic
Exposure Management
Western Mining Company (WMC) is an Australia-based minerals producer with business interests
in 19 countries. It is the world’s third largest nickel producer, owns 40 percent of the
world’s largest alumina producer (Alcoa World Alumina and Chemicals), and is a major producer
of copper, uranium, gold, fertilizer, and talc. WMC builds its business on large, low-cost,
and long-life assets that are globally competitive.
Most commodities produced by Australian mining companies, including WMC, are exported
and priced in US dollars. Thus, these companies would suffer significantly and their Australian
dollar revenue would drop if the Australian dollar appreciated sharply against the US dollar.
Given such an exposure, the conventional wisdom held that borrowing in US dollars would
provide a “natural” hedge against their dollar revenue stream. When forward markets began
to develop in the mid-1970s, Australian mining companies often hedged up to 100 percent of
forecasted revenues with a combination of debt servicing and forward contracts — often for
periods up to 10 years. In the early and mid-1980s, the Australian dollar declined sharply
against the US dollar, and the “natural” hedge proved not to be a hedge at all, but rather an
uncovered short position in the US dollar. As expected, the decline in the Australian dollar
242 MANAGING TRANSACTION EXPOSURE AND ECONOMIC EXPOSURE
increased the cost of serving US dollar debt. And those companies that had also sold forward
their expected dollar revenue stream also suffered further foreign-exchange losses as these
contracts matured. The positive effect of the stronger US dollar on dollar-denominated revenues
was offset by a prolonged slump in mineral commodity prices.
Although WMC also experienced some currency losses, it fared better than many of its
competitors for two reasons. First, it had relied more on the equity markets to finance capital
expenditures. Second, it had not participated in new major projects in the early 1980s. In
1984, however, the company contemplated investment in a new copper, uranium, and gold
mine, with capital costs expected to be about $750 million. Under arrangements with a joint
venture partner, the company planned to finance its share of the mine solely with debt, thereby
increasing its total debt by a magnitude of two or three times.
When confronted with the need to decide the currency denomination of the debt, WMC
concluded that taking a short position in US dollars, whether by borrowing or selling forwards,
would not stabilize the volatility of its home-country operating profits. Consequently, WMC
decided to borrow in a basket of currencies that included Australian dollars, US dollars, Japanese
yen, British pounds, and deutsche marks. The company also decided to discontinue its
practice of selling forward US dollar revenues, except when actual sales had been made.
Case Questions
1 Evaluate the pros and cons of various exchange-hedging instruments and techniques.
2 What are the different types of foreign-exchange risk that WMC will encounter?
3 Explain why borrowings in US dollars and forward sales of US dollar revenues by Australian
mining companies in the 1980s had backfired.
4 Explain why WMC decided to borrow in a basket of currencies rather than exclusively in
US dollars or Australian dollars.
5 What are two possible ways to hedge economic exposure?
6 Explain why WMC decided not to hedge its economic exposure (i.e., future US-dollar revenues).
7 The websites for various multinational companies disclose exchange rate hedging activities
and their exchange gains or losses. (Hint: see footnotes of annual reports.) On the
basis of the website of WMC, www.wmc.com.au, or the website of IBM, www.ibm.com,
describe the management of foreign-exchange risk for either company.
Sources: N. Abuaf, “The Nature and Management of Foreign Exchange Risk,” Journal of Applied Corporate
Finance, Fall 1986, pp. 39–44; P. J. Maloney, “Managing Currency Exposure: The Case of Western Mining,”
Journal of Applied Corporate Finance, Winter 1990, pp. 29–34; WMC’s Annual Reports, various issues; and
www.wmc.com.au.
Перевод: